PROBLEM 8–22 Behavioral Aspects of Budgeting; Ethics and the Manager [LO1]
Granger Stokes, managing partner of the venture capital firm of Halston and Stokes, was dissatis- fied with the top management of PrimeDrive, a manufacturer of computer disk drives. Halston and Stokes had invested $20 million in PrimeDrive, and the return on their investment had been unsatisfactory for several years. In a tense meeting of the board of directors of PrimeDrive, Stokes exercised his firm’s rights as the major equity investor in PrimeDrive and fired PrimeDrive’s chief executive officer (CEO). He then quickly moved to have the board of directors of PrimeDrive appoint himself as the new CEO.
Stokes prided himself on his hard-driving management style. At the first management meet- ing, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the
departmental budgets that had been submitted for his review and yelled at the managers for their “wimpy, do nothing targets.” He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget.
Keri Kalani, an accountant working for the production manager at PrimeDrive, discovered toward the end of the year that her boss had not been scrapping defective disk drives that had been
returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased volume, and returns of defective TRX drives were running as high as 15% of the new drives shipped. When she confronted her boss with her discovery, he told her to mind her own busi- ness. And then, to justify his actions, he said, “All of us managers are finding ways to hit Stokes’s targets.”
1. Is Granger Stokes using budgets as a planning and control tool?
2. What are the behavioral consequences of the way budgets are being used at PrimeDrive?
3. What, if anything, do you think Keri Kalani should do?
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